Forget About QE3, The ‘Fiscal Cliff’ Will Drive Gold This Fall

By Tim on 07/13/2012 in Currencies, Debt

[Some thoughts about what might drive the gold price during the second half of the year.]

Well, maybe the word “forget” is the wrong word to use here since, more so than at any other time in history, the direction of the gold price has been driven by expectations about whether the Federal Reserve will launch a new round of money printing or not, however, investors seem to have already forgotten that the Fed was largely out of the picture when the gold price rose to a record high late last summer.

It was fractious debt ceiling debate and downgrade of U.S. credit that sent the trade weighted dollar sharply lower along with domestic equity markets while the yellow metal was soaring toward the $2,000 mark as shown below and this sort of thing could happen again this year.

Once the U.S. government had “kicked the can down the road” one more time, markets settled down, the dollar rose along with equity markets as the gold price plunged, investors regaining confidence in the world’s reserve currency once again while eschewing what has served as a global currency for thousands of years.

Is there any reason to think that, with the fiscal choices staring policy makers down later this year now even more extreme, elected officials will do any better this time around?

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2 Responses to Forget About QE3, The ‘Fiscal Cliff’ Will Drive Gold This Fall

  1. rich t July 13, 2012 at 2:41 PM #

    Interesting perspective. I think one other factor in helping gold rally big was the anticipation of more Fed balance sheet expansion, because everything was going to hell. Then gold tanked on the failure to ease further (when they did Twist instead). Any thoughts?

    Reply
    • Tim July 13, 2012 at 4:12 PM #

      If that was the case, then stocks would have rallied as well (at least a little) rather than plunging as shown on the chart.

      The rise in the gold price last summer was a very different (and surprising) dynamic as I think gold demand was driven more by its “alternative currency” characteristic rather than any of the other ones (e.g., inflation hedge).

      I think the gold price tumbled more from the realization that the U.S. dollar was getting its act together (at least for the next 15 months until the can has to be kicked again).

      Reply

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